D.C. attorney general sues Instacart over alleged ‘deceptive’ service fees

The District of Columbia is suing online grocery delivery giant Instacart for allegedly charging customers with “deceptive” service fees and not paying sales tax on those fees.

Washington, D.C., Attorney General Karl Racine announced the lawsuit against Instacart today. San Francisco-based Instacart denied the suit’s claims.

“We believe the accusations made in this complaint are without merit,” Instacart said in a statement on Thursday. “We’re disappointed with today’s action by D.C. Attorney General Racine’s office, and we welcome the opportunity to continue an open dialogue on these matters.”

The D.C. Office of the Attorney General (OAG) claims that, over an 18-month period, Instacart didn’t specify to consumers that optional service fees were added to their bills, creating confusion that led some customers to think the fees were tips for delivery workers. OAG alleges that the fees were an “extra revenue source for the company.” In addition, the suit charges Instacart with violating D.C. tax law by not collecting “hundreds of thousands of dollars” in sales taxes on delivery and service fees.

“Instacart tricked District consumers into believing they were tipping grocery delivery workers when, in fact, the company was charging them extra fees and pocketing the money,” Racine said in a statement. “Instacart used these deceptive fees to cover its operating costs while simultaneously failing to pay D.C. sales taxes. We filed suit to force Instacart to honor its legal obligations, pay D.C. the taxes it owes, and return millions of dollars to District consumers the company deceived.” The suit also seeks civil penalties and restitution of legal costs.

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Specifically, the lawsuit alleges that from September 2016 to April 2018, Instacart charged D.C. customers a default 10% service fee for deliveries, which OAG said appeared “to a reasonable consumer” to be a tip. The amount was set as a percentage of the order total, and consumers could raise or lower the percentage or waive it, OAG explained, adding that no tip option was visible at checkout and the fee went to Instacart for operating expenses. The D.C. attorney general’s office said Instacart changed its service fee practices in April 2018 in the wake of media reports and contact by OAG, yet didn’t refund the alleged “deceptive” fees to customers. The situation also led to Instacart not collecting D.C. sales tax on the fees received, the suit said.

Instacart, however, said it clearly explains its fee and tip policies to customers. The company also noted that it assesses local laws and state-issued guidance on an ongoing basis to ensure compliance.

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“Customer transparency is incredibly important to Instacart. In our product, we disclose to customers that tips are always separate from and in addition to any service fees, and we clearly indicate that service fees go towards our operations,” Instacart stated. “Additionally, 100% of customer tips always go to Instacart shoppers, who are providing an important essential service for customers.”

In early 2019, Instacart announced it was instituting a new earnings model for its personal shoppers to keep customer tips separate from the payments it makes to them in fulfilling orders. At the time, Instacart founder and CEO Apoorva Mehta said in a blog post that tips earned by shoppers would come “in addition to Instacart’s contribution." The move came after widespread shopper complaints, including in social media and published reports, that a new earnings structure introduced by Instacart in the fall of 2018 ended up siphoning their tips by counting them toward minimum payments for orders.

Instacart personal shoppers pick, pack and deliver online orders. In response to increased demand during the COVID-19 pandemic, the company has enlarged its base of personal shoppers by more than 500,000 to a total of over 750,000. Instacart is North America’s largest third-party grocery delivery provider, partnering with more than 400 retailers and providing delivery and/or pickup service from over 30,000 stores across more than 5,500 cities in the United States and Canada.

Last November, the D.C. attorney general also sued last-mile food delivery provider DoorDash. The suit claimed that, from July 2017 to September 2019, DoorDash used consumer tips to offset the company’s payments to delivery workers and misrepresented its tipping practices to consumers. In a statement at the time to the Washington Post, DoorDash called the charges “without merit” and noted that it clearly discloses its pay model to “Dashers” — the moniker for its delivery personnel — as well as customers and the general public.